Demystifying the "Cash Back" Mortgage. Can it be used for down payments?
You're thinking "FREE CASH", that's excellent...Time to take a vacation, pay-off debts, or can I use it for my down payment? The most common misconception is people still think you can use these "cash back" mortgages for down payments, and don't understand the massive implications and costs that these mortgages come chained with.
When you hear "no down payment", "zero down"; it's the cash back mortgage incentive programs with lenders being accessed.
Cash back mortgages are not allowed to be used for down payments with CMHC. However, Genworth does have a Cash back Equity Program. That doesn't mean lenders have the program.
In 2012, the Office of the Superintendent of Financial Institutions (OSFI) changed regulations again, explicitly stating that "Incentive and rebate payments (i.e., "cash back") should not be considered part of the down payment,". Who is governed under OFSI, BANKS and TRUST Companies.
You will need to look at Credit Unions for these now as they are not governed under the OFSI rules. Finding a credit union that is offering a "cash back" mortgage changes randomly and are difficult to find. As of today (Feb 2015), no one is offering it. Last year VanCity did offer it, but has since pulled the program.
Today, cash back mortgages cannot be used for down payments. They can be used to help with; lawyer fees, closing costs, just putting cash in the bank, for renovations, prepayment penalties (if a transfer or refinance) or taxes.
If a bank is telling you it's being used for the down payment on your purchase; they are likely doing some "fast moves" behind the scenes. They are into making money, not giving it away for free. I have seen them open an unsecured line of credit, withdrawing funds (as your down payment), then using the proceeds of the "cash back" to pay off the line of credit. Now your paying a higher rate for their "cash back" mortgage program, yet really it could just be a simple flex down mortgage that is at a normal rate.
I can't stress how important reading the fine print is with "cash back" mortgages. I call them this as the rates are higher in penalties can be extreme if you have to break your mortgage.
Let's look at a cash back scenario. You really want to borrow $15,000 for paying off debts, or for me...traveling to Thailand. Borrowing $300,000 at 2.79% (5 year term, 25 yr amortization, monthly payments) will cost you $38,637.61 in interest over 5 years. You want to have a cash back mortgage of 5% ($15,000) at a rate of 4.79%, $315,000 (same terms) will cost you $70,544.64 in interest. Your $15,000 cash just cost you $31,907.03 in interest! That's just the interest! Cash grab anyone?
There are good reasons for some people to have this program, but usually there are financially savvier structures that are much more cost effective.
Notes to ponder:
Cash back programs can range from giving you "cash back" of 1-5% of the total mortgage loan amount. Some have maximum loan amounts as well.
If the loan is re-reimbursed, transferred before maturity date, the borrower maybe required to reimburse the lender for the cash back amount granted on a pro rated basis of the remaining term.
Rates vary significantly from posted rates (ie: today at 4.79% for a 5 year term) to slightly less rates. All rates vary from different lenders, the term you choose and how much cash back percentage you want.
cash back mortgages can have extraordinary penalties payouts, restrictive clauses and expensive claw back (ie 100% repayable) rules.
Using a mortgage expert when considering this type of mortgage program is crucial. There are so many rules and rates that we can help you demystify.